ECONOMICS: by Colin TeeseNews Weekly
US prosperity and growth in the 1990s
, September 20, 2003
A week or so back, ABC Radio National interviewed Dr Paul London, an American, who served both George Bush, senior, and Bill Clinton in important positions in the US Department of Commerce in the last few years of the twentieth century.
Dr London correctly observes that the US economy was the engine of world economic growth in the decade of the nineties. He should have gone further. He might have added that the US economy has been an economic weather vane to the world for the last fifty or so years. Over that period, its health, or otherwise, has quickly stamped itself to the rest of the world.
This consideration apart, Dr London's views about the reasons for US prosperity in the 1990s - as expressed to Radio National - are deeply rooted in current economic orthodoxy; yet they are controversial.No accident
US prosperity in the nineties was not, he insists, attributable to any accident. Or to any isolated acts by administration officials. Not to the first George Bush nor Clinton, both of whom increased taxes to deal with the budget deficit; not to the Chairman of the US central bank, and his efforts to deal with inflation by manipulating interest rates; not to technology advances; and certainly not to the speculative asset boom, which central bank Chairman Alan Greenspan presided over.
The sole reason for the success of the US economy in the nineties, according to Dr London, was due to it being opened up to the full blast of competition, deregulation and the destruction of previously existing monopolies in the areas of transportation, communications and energy.
Open trading policies, he maintains, were at the center of the new initiatives; because, by the application of these policies, US manufacturing industries were forced to become efficient.
It is a fascinating point of view, and there is an element of truth in it. But it also overlooks issues that should have been considered, and it takes no account of the adverse consequences of the policies.
Of course Dr London is right to characterize Greenspan's policies of containing inflation through the management of interest rates as being hardly more than marginally successful. In London's own view putting US manufacturing industry under international competitive blow torch was a far more effective tool in fighting inflation. He is almost certainly correct. At the same time he gives no credit to the policy of keeping wage increases in check by means of maintaining a sufficiently large pool of unemployed as a factor in inflation control.
Dr London gives also fails to acknowledge the vital role of consumer credit in fuelling economic growth. In fact, the existence of off-shore borrowing, which was a consequence of policy rather than part of any policy prescription, may have been more decisively important in sustaining the US economic boom through the nineties than any other single factor.
The trouble with the London view is that it gives us only part of the picture. In fact, the reasons for the apparent strength of the US economy in the nineties are many, varied and complexly interconnected. Indeed, they are far too complicated to be considered exhaustively, either in a brief discussion on Radio National, or, for that matter, in this article. Dr London, who is presently writing a book on the subject, could hardly disagree. Nevertheless, some things can be said.
It was once possible to place considerable store on the possibilities for economic growth to be gained from financial deregulation, trade liberalisation and so-called anti-competition policies. Dr London obviously still does. And certainly, the theory standing behind that idea has a deceptive ring of simplicity to it. Take away all the impediments to the operation of the economy, all the regulations, and let the market operate. In the end that is the only way to achieve the best possible economic outcomes.Government involvement
And if unfettered market economics works best then, quite clearly, the more governments tamper with the economic process, the worse will be the outcomes.
That is the logic behind Dr London's claims. But others will find it harder to accept the inevitability of a connection between the policies he refers to and the economic benefits he insists flow from them. After all, policies Dr London outlines began to be implemented long before the nineties. Taking his views at face value, after two decades of build-up and a mere decade of success, the US economy sank into a serious decline from which no clear pattern of recovery yet seems obvious.
And, of course, if 1990's growth is to be attributable to the policies Dr London identifies, then he must also concede that they are equally responsible for the current downturn in US economic fortunes - and for the consequences that has had for the rest of the world.
All of that aside, let us examine the detail: have the policies operated in precisely the way Dr London would have us believe? Open trade policies for a start. True these have put some US businesses under intense competitive pressure. But the US has been quite selective as to which of its industries it has been prepared to expose to the full blast of such pressure. Moreover, it has always stood ready to invoke its anti-dumping rules against cheap imports. And in ways which are not consistent with the rules of the World Trade Organisation.
Dr London makes particular reference to the 'big three' US car manufacturers being pressured by imports to make better cheaper products, and that this competitive pressure has found its way into related US manufacturing industries. Car makers demand cheaper steel, and so on.Protection
In fact, steel is one of the many US industries to be given the benefit of dumping protection against imports. In any event, it seems that pressure on traditional US car manufacturers is coming from Japanese and other foreign-owned manufacturers located in the United States, rather than from import competition.
And, what about cheap imports? Has the pressure suffered by US manufacturers from cheap imports always been good?
Not necessarily. Having to compete on price has the effect of cutting profit margins, sometimes to the point where the business, however efficient, becomes unprofitable. Just to take one example. As Dr London no doubt knows, the European consortium Airbus has been able to take market share of airliner manufacture from Boeing on the basis of product subsidised by the European taxpayer. If Boeing must cut prices to maintain market share there comes a point where profit margins are so small that the company's ability to fund future product development is threatened.
London's analysis - like many Australian defenders of the same policy prescriptions - seems unwilling to take seriously, such facts. Nor is the adverse effect confined to the manufacturing sector. As Australian farmers well know, perfectly efficient farmers can be driven out of business by subsidised imports.
As to competition in the transport, communications and energy sectors it is surprising to find a commentator any longer prepared to hold these out as examples of successful policies. Especially in the US,. electric power generation and distribution is a particularly embarrassing example, given what has happened with Enron in California and more recently with the breakdown of power distribution in New York. The other sectors are hardly great successes either. Cheaper airfares have come at the price of much inconvenience to travelers, who frequently need to make several stops to reach a destination which was once accessible by direct flight. Cost savings frequently come with some hidden price tag.
All of the above is, however, at the level of detail.
At a different level, can Dr London assure us that economic growth based on consumer spending funded by off-shore borrowing, is a sure fire recipe for sustained growth? Results so far do not suggest so.
And, of course, Dr London's analysis takes no account of wider social and strategic considerations which are coming into ever sharper focus. These considerations are casting new doubts upon the virtues of market-based economics in the face of terrorist threats - at least in the US. Christopher Sheil, a Research Fellow at the University of New South Wales, made this clear in a recent, important article in the Australian Financial Review.
Commitment to market economics necessarily rests on the idea that governments should do as little as possible, beyond maintaining order and safeguarding the country. Outside of these areas, government and politics were themselves, actually an impediment to the economic process. The role of government in shaping public policy has been consistently denigrated for the last couple of decades in the interests of promoting economic libertarianism.Virtues of government
The war on terrorism appears to be reestablishing the virtues of government - at least among US neo-conservatives. At a time when the nation needs to be brought together to confront terrorism, market based economics - and its connection with 'liberalism' and with its emphasis on self and self-interest - is suddenly going out of fashion. And with good reason.
As the US's leading neo-conservative, Irving Kristol, has made clear, if citizens are to be asked to fight for - and perhaps die for - their country, then it will have to be in defence of something more substantial than some crack-pot set of economic theory based on the notion of 'economic man' enjoying his unfettered right to pursue his unenlightened self interest.
The times are reminding us - or at least they are reminding the US - that there is something more to life than mere economics; and important elements in the present US government appear once more determined to define the difference.
Is it any wonder, that Kristol, and others like him, are of the view that society needs to be recharged with politics and religion; and that economics should again be relegated to its proper place - serving rather than directing the political and policy process.
Australia would do well to take heed.